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Basic Difference Between Invoice Financing vs Trust Receipt

By Annapoorna

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Updated on: Mar 16th, 2023

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6 min read

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Business owners and managers can be troubled by irregular cash flows and limited cash reserves. They can use alternative financing rather than equity or debt-based funding during such times. They can evaluate invoice financing vs trust receipt to figure out ways to plug the cash crunch.

Meaning of Invoice Financing

An invoice financing agreement allows your business to borrow money against overdue invoices from your customers. The receivables are then used as collateral for the invoice financing agreement. The business can exercise considerable control over its cash flow operations and working capital funds through this alternative. 

Considering those two aspects on track, the business's growth is deemed consistent. Since the financing company takes on the responsibility of following up on payments of unpaid invoices, the business can optimally utilise its resources on its regular operations.

Meaning of Trust Receipt

The trust receipt is an essential document when the buyer has a financing arrangement with the bank to buy goods or any other asset. The trust receipt indicates that while the business obtains possession of the goods or the asset, the bank holds the title of ownership to the asset in question until the business repays the advance.

If the buyer fails to repay the loan, the bank has every right to sell the assets to settle against the outstanding dues of the buyer.

A car dealer borrows funds under a trust receipt agreement to purchase automobiles from a manufacturer. When the dealer sells a car, the lender transfers the title to the dealer. Dealers transfer titles to buyers after selling cars and paying off their lenders.

Difference Between Invoice Financing vs Trust Receipt

Here are a few distinctions that can be made for invoice financing vs trust receipt-

Invoice FinancingTrust Receipt
A business can borrow money against its unpaid invoices.Trust receipt serves as a promissory note for the bank, which indicates the buyer will pay after the sale.
Usually, the risk is assumed by the financing company.The bank assumes majority of the credit risk.
No collateral necessary aside from the unpaid invoices.Property or goods are provided as collateral.
Control exercised by the financing company is not too rigid.Control exercised by banks via the terms and conditions is relatively rigid.
The invoices and their related details have to be submitted to the financing company.Excessive documentation has to be provided to the banks.
The financing company will charge a certain percentage towards their fees before disbursing the invoice amount to the business.Interest charges will have to be paid to the bank.
Commonly used in domestic transactions.Commonly used in international transactions, especially where an importer wishes to import some goods.

Conclusion

Hence, invoice financing vs trust receipt needs thorough evaluation by businesses. Factors are based on the cost of financing, risks ready to be borne, and availability of collateral to pledge for funds. Invoice financing is always an attractive option and convenient for businesses, especially the startups.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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